Pharma’s 95% Rally Sparking M&A Fever: Corporate Brazil

The two-year acquisition spree billionaire Andre Esteves has orchestrated at Brazil Pharma SA is sparking a rally that’s almost doubled its stock price and set a growth model that other drugstore chains are following.

Brazil Pharma, which is controlled by Esteves’s Grupo BTG Pactual, has soared 95 percent to 15.30 reais since its June 2011 initial public offering as the company boosted its revenue sixfold through a half-dozen acquisitions. The rally dwarfs the 12 percent gain on the BM&FBovespa Small Cap index over that period and compares with an 8.3 percent loss in Brazil’s benchmark Bovespa index.

Esteves is exploiting a 31 percent increase in Brazil’s per capita income in the seven years through 2011 that is fueling a surge in demand for health care products in Latin America’s biggest economy. His success is helping prompt international and local companies, including Sao Paulo-based Hypermarcas SA, to seek to gain market share by acquiring smaller rivals, according to Banco Bradesco SA and Sao Paulo-based brokerage Coinvalores.

“Brazil Pharma’s strategy and great performance has attracted attention to this sector not only from national companies but also from big players in other countries,” Sandra Peres, an analyst at Coinvalores, said in a phone interview. “With the profit potential and the fact that the retail market is still so fragmented into small stores, the consolidation process presents a lot of opportunities.”

Product Mix

The 4,700 stores operated by 31 Brazilian drugstore chains had combined revenue of 25.1 billion reais ($12.7 billion) last year, which was a 16 percent increase from 2011, according to the industry association Abrafarma.

While drugstores have benefited from increased sales of prescription medication, revenue growth also is coming from complementary items that are becoming a more important part of the product mix, said Ricardo Boiati, an analyst at Bradesco. Demand for toiletries, cosmetics and perfumes in Brazil more than doubled from 2006 to 2011, according to data compiled by London-based research firm Euromonitor International.

“Brand-name drugs are the retailers’ main product and will continue to be, but the mix is being more diversified with generic drugs and personal care items,” Boiati said in a phone interview from Sao Paulo. “Drugstores are becoming more like convenience stores, and sales should keep the rhythm of growth.”

Revenue Increase

Boiati has a buy recommendation for Brazil Pharma, with a 12-month price target of 16.30 reais. On a scale of 1 to 5, with 5 being the most positive, the consensus of analyst ratings for the company’s shares is 4.4, compared with an average of 3.5 for the Bovespa’s members, according to data compiled by Bloomberg.

Brazil Pharma increased its revenue 520 percent in the 12 months through the third quarter of 2012, more than any other drugstore chain in the world, to 744 million reais, according to data compiled by Bloomberg. Raia Drogasil SA, Brazil’s biggest drug retailer by market value, posted a 36 percent increase in sales during the same period to 1.4 billion reais.

There were 10 mergers among Brazilian drugstores and pharmacy services providers in 2011 and 2012, according to data compiled by Bloomberg. That was the most in any two-year period on record and compares with 195 worldwide.

Drogasil SA’s 2.1 billion-real takeover of Raia SA was the biggest transaction during the period. Brazil Pharma’s 471.6 million-real purchase of Grupo Big Ben was the second largest.


The pace of consolidation is continuing this year as CVS Caremark Corp., the largest prescription drug provider in the U.S., said Feb. 6 it bought Brazilian chain Onofre in its first purchase abroad. It didn’t disclose the financial terms of the deal.

Drugmaker Ache is in talks to sell a stake, said two people familiar with the talks who asked not to be identified because they are private. Hypermarcas, the consumer products company that gets 53 percent of its revenue from prescription and over-the-counter drugs, is in discussions to buy the stake with BTG Pactual, said one of the people. Distributor Profarma Distribuidora de Produtos Farmaceuticos SA said Feb. 14 that it’s raising cash for acquisitions.

Officials at Hypermarcas and BTG declined to comment. Ache said in an e-mailed response to questions that the company isn’t up for sale. It provided no further comment.

‘Very Complicated’

As the the industry consolidates, the main risk to the companies that are expanding through acquisitions is the fragmented system of laws and regulations that apply to drugstores and pharmacy services providers throughout Brazil, said Geraldo Monteiro, executive director of wholesale distributors association Abradilan.

“Aside from federal laws, each state has its own standards and cities create their own rules as well,” Monteiro said in a phone interview. “For instance, drug retailers in Sao Paulo can sell cereal bars, but no kind of food product is allowed in drugstores in the state of Goias. It’s very complicated for a chain that has operations spread into several parts of Brazil to manage all the details.”

Brazil Pharma’s ability to assimilate the smaller companies it has purchased has made it a standout in the industry, according to Peres at Coinvalores. “It’s one of the things competitors are trying to replicate,” she said.

The pharmacy chain’s management has sought to standardize the appearance of the stores while respecting the differences in culture and regulations in different regions, according to Otavio Lyra, Brazil Pharma’s investors relations manager.

“The recent interest of other companies in our market is just the last development in the consolidation trend,” Lyra said. “It’s only natural, considering that sales have been growing at a 10 percent rate annually for more than a decade in Brazil. Not even the economic crisis affected the industry’s performance, because remedies will always be a basic need.”

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